Thursday, September 2, 2010

As working families and small businesses struggle, it has never been more principal for the country to address the soaring cost of medical care. Throughout the health care reform debate, discussion focused around health insurance premiums, but mistreated the most important policy questions facing our health care system: Why are medical costs constantly increasing faster than overall economic growth? Why has the use of tests and equipment continued to soar? How have changes in the health insurance risk pool impacted premium rates?

The new health care reform law includes some changes to the way premiums are regulated, but did very little to address the main issues that cause premium increases. The legislation include a new federal cap on health plan administrative costs and profits, new processes to review the reasonableness of premium increases, and other resources to states to conduct these reviews. As final regulations are drafted in these areas it is critical that they be based on objective actuarial standards that take into account all of the aspects that drive up health care costs. An arbitrary and politicized rate review process can have significant unintended consequences for consumers. Sometimes regulators attempted to cap premiums while allowing medical costs to resume to soar. This action threatened to cause massive instability and disruption for families and employers and was finally overturned by an appeals panel.

Is medical CPI an accurate measure of how much health care costs are rising? The medical element of the Consumer Price Index (Medical CPI) is an average of prices charged for a defined group of services. It doesn’t reflect hospitals that are demanding double-digit increases or new pharmaceuticals that cost hundreds of thousands of dollars. Nor does it include other major factors that drive increases in health care spending, such as increased utilization, the needs of an aging population, and the increased use of expensive new medical technologies.

Rates that are actuarially justified should be deemed reasonable. This analysis should continue to be conducted at the state level because states have the experience, infrastructure, and local-market knowledge to review premium rates. If premiums are not allowed to keep up with rising medical costs, it would put at risk the coverage that patients rely on today. Now is the time for the country to shift focus to the real source of the cost problem and consider solutions that will reduce the future rate of growth of health care costs. Health plans can play an important role in addressing this challenge.